SMSF non-arm’s length income rules and unit trust structures
15th April 2013
Ungeared and / or unrelated unit trust structures held by SMSFs can allow more things to be done in the concessionally taxed SMSF environment – fantastic!
But, you need to ensure the SMSF has a “fixed entitlement” to the income of the unit trust, particularly under the trust deed. If it doesn’t, the SMSF will be taxed on its share of the income at 45.0% (as non-arm’s length income). No exceptions. None.
Fixed entitlement in this context is a tax definition, and in practice not all unit trusts provide for this.
The ATO's view is that “very few trusts satisfy the definition of 'fixed trust' … in the absence of the exercise of the Commissioner's discretion (essentially because beneficiary entitlements to income or capital are generally liable to be defeated by the exercise of a power in the deed or by a statutory power).”
If you’re unsure, review the trust deed!
About Tax Bites
Tax Bites are general in nature and are not a substitute for specific advice. They are the opinion of Tax Advisory Specialists, and the ATO or the Courts may take a different view. They are not updated for changes in the law or the interpretation of the law since publication.